Year in data 2015: Foreign exchange

The
role of high-frequency traders in financial markets and
their relationships with traditional banks in frequently traded
markets became a big talking point in 2015, particularly in
foreign exchange.

Banks’ uncertain relationships with HFTs could
immediately be seen in the chart below, published in the June
issue of Euromoney
as part of our annual FX survey. This shows the volume and
market share rankings of the leading banks among this client
group. The HFT sector appeared to be getting more competitive.
Leader Citi’s market share fell from a high of
33% in 2014 to 18.7% last year, with UBS hot on its heels. The
biggest riser was Bank of America Merrill Lynch, whose share of
the HFT market grew from less than 1% in 2012 to more than 15%
in 2015.

Dealing with HFTs divides opinions and strategies in FX. It
is a client group driven purely by price and therefore provides
little in the way of profit. Others see it as simply
outsourcing liquidity to other providers – although
whether HFTs actually provide liquidity or simply match
back-to-back trades, is another
contentious issue that Euromoney wrote about in 2015.
Deutsche Bank, for one, has largely withdrawn from trading with
HFTs, as the data show.

This year’s talking point is likely to be the
evolution of some HFTs to become market-makers in their own
right. Leading the way in this is XTX Markets, as revealed in
the December cover story of Euromoney. As
former head of FX at Deutsche, Kevin Rodgers, wrote for us in
June as the FX survey results were published: "We should
expect non-bank liquidity providers to become more important in
spot FX. Electronic provision has become an almost purely
technological battleground, and non-bank outfits have the
strong advantage of specialization."

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